Is Residence-Based Taxation on the Horizon? How a New Bill Could Transform the US Expat Experience

Millions of Americans living abroad face the burden of citizenship-based taxation (CBT), which requires them to file and often pay taxes on their worldwide income regardless of residency. The US is one of only two countries with such a system. Now, a proposed residence-based taxation (RBT) bill is sparking hope and debate among expats.

What Is Residence-Based Taxation?

RBT would tax individuals based on where they live rather than their citizenship. For example, an American living in Germany for a decade would only be taxed on their German-sourced income by German authorities, not the IRS, provided they meet specific qualifications.

Advocacy groups have pushed for RBT, citing the challenges CBT creates, such as double taxation risks, excessive paperwork, and foreign bank account closures. The proposed bill offers qualified Americans abroad the option to elect RBT, potentially transforming their financial lives.

Potential Benefits for Expats

If enacted, RBT could:

• Reduce Double Taxation: Expats currently rely on mechanisms like the Foreign Tax Credit (FTC) or Foreign Earned Income Exclusion (FEIE) to avoid being taxed twice. RBT would simplify this by prioritizing the country of residence as the primary tax collector.
• Simplify Filing Requirements: Endless forms such as FBAR, FATCA/8938, and others could become less burdensome with proof of foreign residency.
• Ease Banking Challenges: Foreign banks might be more willing to serve Americans if they’re not tied to complex US reporting laws.
• Offer Peace of Mind: Expats could feel liberated from the constant oversight of the IRS, especially those who haven’t lived in the US for decades.

Challenges and Criticism

Despite its promise, RBT faces obstacles:

• Revenue Concerns: Critics fear the US could lose tax dollars. Though most expats owe little to no US taxes after credits, the optics of a “tax break” might spark controversy.
• Abuse Potential: There are worries that high-net-worth individuals could exploit RBT to shield income. Legislative guardrails would be essential.
• Complex Implementation: The IRS might impose strict residency tests or additional forms, potentially leading to more red tape.

Implications for Accidental Americans

RBT could be a lifeline for “Accidental Americans”—those unaware of their US citizenship status until facing tax compliance issues. For this group, RBT could end unwarranted IRS headaches.

Political and Public Perception

The success of RBT depends on political will and public perception. Advocates argue it’s about fairness, while critics might frame it as a tax dodge. Broader support could hinge on public understanding and high-profile endorsements.

Next Steps

The bill’s progress might include:

• Committee Hearings: Debating income thresholds, residency definitions, and other details.
• Media Coverage: Expect testimonials and analysis to shape public opinion.
• Grassroots Advocacy: Expat groups encouraging Americans abroad to contact representatives and share their stories.

Conclusion

Residence-based taxation could end an era of financial complexity for expats, aligning the US with global norms. Whether seen as overdue reform or a controversial loophole, the debate around RBT reflects broader questions about citizenship and fairness. As the legislative process unfolds, the fight for RBT is heating up—and the world is watching.